'I have to believe this year will be better than the last' - Craig Brunsden, AxizLife in South Africa is anything but dull. In 2018, we’ve already witnessed a change of president, a subsequent change of Cabinet, and a national budget that spat out a rise in the fuel levy and a 1% rise in VAT – the first in 25 years. It seems business confidence has increased, but reservations remain about the tighter economy and the shadow of the third junk status decision.
“Just because things are looking better with the change of leadership doesn't mean the fundamentals have changed,” says Craig Brunsden, MD, Axiz. “The rand has been reacting positively, probably on the expectation that the new crew will clean things up, but we have some serious problems with state utilities and Eskom downgrades, among others. It’s a challenging operating climate ahead.”
Irnest Kaplan, MD, Kaplan Equity Analysts, agrees that it’s going to be a tough year. “There's a lot of squeeze happening, so the tougher the economy in general, the more the squeeze and the more the IT companies will feel it.
“The mood has improved since the ANC's December conference,” admits Izak Odendaal, investment strategist, Old Mutual Multi-Managers. “However, we need a few more concrete measures to ensure that improvement in confidence translates into more spending and investment by companies on IT, and other forms of fixed investment.”
Although the prospects for calendar 2018 look better than they were in 2017, the outlook remains mixed, says Brunsden. “For a while now, IT spend has been flat to slightly negative or slightly positive, depending on the sector. We don't expect that to change.
“A trend we felt on the ground, from the channel – customers, vendors, partners – was that spend was locked up. The money was there, but spending was only for necessity," he says. Kaplan agrees a lot of larger companies had been nervous to embark on major IT projects since mid-2017.
“The same has to be said for public sector,” he adds, “as there's been a lot of holding off on projects and investments given the confusion in various government departments, meaning that some spending has been affected.”
Brunsden adds: “If we can see ‘Corporate South Africa’ spend opening up, and government spend also improving with a bit more political certainty, I have to believe this year will be better than the last. But we remain very cautious.”
“I would say the outlook is better,” says Odendaal. “Businesses will look at more consumer spending, a healthier global economy and decide that they too can spend a bit of money to improve productivity, to grow sales to enter new markets.”
Consumer challenges
When it comes to consumer retail in the tech sector, there are some challenges to confront, such as the increase in VAT. Another issue is the impact of the Steinhoff accounting fraud saga on players like JD Group and Incredible Connection. “We're seeing some stress in the volumes (in consumer retail). There's both stress from the customer side and the supplier side. We’re expecting fairly difficult trading conditions to continue there,” says Brunsden.
A shining beacon in the gloomy outlook for the channel is cloud computing services and solutions. “I'm hearing more and more companies considering putting their workloads in the cloud. It's safe to say its gaining momentum,” Kaplan says.
“Cloud will continue to grow,” agrees Brunsden. “I think Microsoft will have a major impact on the market, with its two Azure datacentres launching locally during the course of the year. Depending what side of the fence you're on, it could be really good or bad for the channel.
“It will be a downside for local hosting providers, but it will probably accelerate the public cloud story as other international players will start landing technology. Anyone who's not spending money on public cloud because of data sovereignty or latency concerns, which are the two biggest cited negatives, will be assured that those effectively go away. Instead of companies hosting with a small local host on his own equipment, host with a hyperscale vendor like Microsoft and let the reseller manage it. The whole dynamic of how IT is consumed and sold could change fundamentally from here on out. It's going to be nothing if not disruptive.”
Cloud defines success
Cloud is not only a growth lever for the local channel, it’s defining the prospects for the enterprise technology sector in general.
Andrew H. Bartels, VP and principal analyst, Forrester Research, says cloud transition is the biggest trend impacting the market. He predicts the big winners in the enterprise IT space this year will most likely be Amazon Web Services, Salesforce, and Microsoft, as they benefit from the tech market's shift to cloud solutions.
Conversely, the transition to cloud also defines which companies Bartels is concerned about. “Among the larger tech vendors, the biggest question marks concern IBM, Dell and Hewlett Packard Enterprise (HPE). All three vendors are struggling against the transition to cloud solutions, and the degree to which that transition will leave room for on-premises systems. We don’t think that cloud will take over everything, and on-premises systems will disappear. Indeed, demand for on-premises systems will continue to grow in developing countries, due to the slowness of building sufficiently robust telecoms infrastructures to support cloud solutions in these regions. However, IBM, Dell and HPE will face competition in those regions from Chinese competitors like Lenovo and Huawei,” he says
“IBM needs to demonstrate that its strategic initiatives in cloud, analytics and security are growing fast enough to produce top-line revenue growth. Dell needs to show that its acquisition of EMC is working. And Hewlett Packard Enterprise, after selling off its services and software businesses, needs to show there’s still demand for its server and storage hardware products.”
Local challenges
Another issue that reflects at vendor level and within the local channel is job pressure. Brunsden says no vendors are recruiting aggressively. While most companies might not be shedding jobs, there's a lot of anxiety over the issue, certainly among the larger companies. Kaplan highlights that locally, a lot of IT services companies are having to decide whether to retain the skills they have, hoping that conditions improve, or to lay them off. A cause of potential disruption unique to South Africa, and one that could impact the local channel, is the water crisis in the Western Cape. “It's the second largest market outside of Gauteng. There are some big IT spenders and resources there. We're making contingency plans for our own operations, but we can expect tough times ahead,” says Axiz’ Brunsden. “We're watching from an employer responsibility perspective and the economic impact; the last thing we need is another reason for growth to stutter. Hopefully we can avoid the ‘Day Zero’ from arriving.”
Brunsden also forecasts that there may be more consolidation to come in the local channel. “Given the trend we've seen in recent years with Telkom and BCX, Dimension Data and NTT, there's certainly some disruption possible with some of the bigger privately held groups,” he says.
We started this article focusing on how changes in government could trickle through and affect channel, and that’s how we conclude. The channel can also expect some disruption from government purchasing and how it spends its money, says Brunsden. “The government spending story will have a big impact on the local channel. SITA has made public it will change how it engages with the local channel. It’s looking to secure more direct relationships with big tech brands, where SITA effectively signs up as a reseller rather than buying from a local reseller. Does that mean they spend less? The general view is the tech budget will be under pressure.” But with the tough market conditions that have been faced in recent years, it's fair to say the channel is used to dealing with pressure.
Broader economic outlook
The appointment of Cyril Ramaphosa as South African president resulted in a short-term strengthening of the rand. However, the broader economic outlook is determined by what's happening globally, such as sentiment to emerging markets, the level of commodity prices and other factors outside of our control, says Old Mutual Multi-Manager’s Izak Odendaal. “The global economy has picked up speed over the last year or so, which is a good starting point for South Africa as we tend to follow the global cycle. There’s a synchronised global recovery taking place as all the big economies in the world are experiencing positive economic growth at the same time.
This will probably support our own growth rate, almost irrespective of what happens here politically. “The global environment is favourable for the rand, and can support it at its current levels or a bit stronger. Commodity prices have improved since early 2016, the dollar has been weak recently and investors are happy, at this stage, to put money back into emerging markets through bonds and equities. If you look at the fundamentals of our economy, the rand is where it should be compared to the rest of the world,” says Odendaal.
He adds that if the rand holds at, or near, its current levels, it's good for the inflation outlook, and importing from overseas will cost less. Lower inflation is also good for consumers. About 60% of South African GDP is consumer spending, says Odendaal.
“Hopefully, the currently strong rand translates into prices that make IT spend attractive,” says Axiz’ Craig Brunsden. “Ultimately, I hope for a stable rand. Some stability is always good for the local channel. When it weakens or strengthens quickly, somebody gets hurt in the middle. We're hoping it will give us a nice predictable run.”